Foreign Currency Exchange Rate Forecast – The Pound declined against the Euro and the US Dollar exchange rates

by Adam Solomon

Sterling / Euro and US Dollar

The Pound declined against the Euro and the U.S Dollar exchange rates earlier in the day yesterday before a report that showed UK gross domestic product expanded 0.5% in the first quarter, matching initial estimates earlier in the month. A rise in UK exports, following the improvement in manufacturing and a weak Pound, helped propel the economy out of contraction and outweighed the biggest slump in business investment in two years.

Exports were up 3.7% in the quarter and net trade was 1.7% of gross domestic product. However, consumer spending slumped 0.6%, reflecting the government spending cuts that began at the start of the year, and corporate investment plunged 4.4%. The report fell in line with preliminary forecasts and the Pound was largely unchanged following the data.

The UK currency pushed back above 1.15 versus the Euro later in the day, after the Irish Prime Minister Enda Kenny said that the European Central Bank should cut interest rates and asked for clarity from EU leaders. The Pound’s strength may stem from a diversification away from the Euro into Sterling, as concerns grow over the sovereign crisis and the threat of contagion to other high-deficit regions in the Euro-zone.

The Pound also traded higher against the U.S Dollar, Australian Dollar and Canadian Dollar through the course of the day, but given the inherent weakness in the UK economic outlook, Sterling sellers may want to consider taking advantage of the current rate or at least placing a stop order to protect against a reversal. The government are hoping that the Pound’s weakness this year will help sustain the economic recovery through increases in manufacturing and exports.

However, the drop in the value of the Pound since 2007 is fuelling the surge in inflation to 4.5%, causing divisions within the Monetary Policy Committee and increased speculation over the timing of the first rate increase. The revised growth figures show that the UK economy expanded 0.5% in the first three months of the year and investors will have been disappointed that the rate of growth wasn’t dragged higher due to the drop in business investment.

The Sterling overnight interbank average suggests that the BoE will wait until February before raising interest rates and the Pound will struggle to sustain yesterday’s momentum on that basis alone. The Organisation for Economic cooperation and Development cut its UK growth forecast and insisted that the Bank of England should maintain additional stimulus measures to support the recovery.

The OECD did concede that the Central Bank would need to start raising interest rates in 2011 to stave off the threat of inflation and the surge in consumer prices. There are concerns that a premature increase in borrowing costs would dampen consumer confidence. The Nationwide Building Society index of household sentiment fell significantly in April, amid concern over public sector job losses and government spending cuts.

The Pound peaked at 1.1580 against the Euro before losing momentum through the U.S trading session and trading back under 1.15 by the close. The UK currency did, however, consolidate on the gains made against the Dollar, as gains in global stock markets helped boost helped boost demand for higher-yielding assets.

Euro / US Dollar

The Euro exchange rate rallied by the most in a month against the U.S Dollar overnight, while the single currency also bounced back versus the majority of the 16 most actively traded currencies. The Financial Times reported that European Financial Stability Facility CEO Klaus Regling had said Asian investors, particularly China, may purchase Portuguese bailout bonds next month, easing concern over the sovereign debt crisis.

The Euro was up 0.7% against the Dollar to 1.4180 this morning, after dropping as low as 1.3970 earlier this week. The single currency will still be vulnerable to with no resolution in sight for the Greek debt situation, while the threat of contagion will also hamper the Euro. The EU commissioner Damakaki stated that Greece’s future in the Euro-zone was at risk, while the government denied it would hold a referendum on further austerity measures.

The Dollar also came under further selling pressure, after the U.S economic data was again weaker-than-expected. Durable Goods Orders dropped in April by 3.6%, the biggest decline since October and followed a 4.4% increase in March. The report suggests that manufacturing is quite inconsistent this year, after spearheading the economic revival.

Today’s Data

U.S 13:30 – Revised GDP (Q1)

U.S 13:30 – Initial Jobless Claims (w/e 21st May)

Article source: http://feedproxy.google.com/~r/ForeignExchangeOutlook/~3/eQBwpG-27yg/10204

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